How is depreciation defined in real estate appraisal?

Depreciation in real estate appraisal refers to the decrease in property value resulting from various factors such as physical wear and tear, functional obsolescence, or economic factors affecting the area surrounding the property. This concept plays a crucial role in the valuation process, as appraisers must account for depreciation to determine the true market value of a property.

Physical obsolescence is seen in properties that suffer from deterioration over time due to age or neglect, while functional obsolescence might occur when a property has outdated features that no longer meet the demands of buyers. Economic factors can include shifts in market desirability or changes to the neighborhood that diminish value.

The other options do not accurately capture the essence of depreciation. An increase in property value due to renovation reflects appreciation rather than depreciation. An appraisal method for older properties does not define depreciation but instead describes a potential approach to valuation. The reduction of property taxes over time is unrelated to the concept of depreciation in the context of property value as assessed in appraisals. Therefore, the correct understanding of depreciation focuses on its role in diminishing property value due to various forms of obsolescence.